For investors looking at the makeup of the S&P 500, one thing is brutally clear — the weightings of many of the most valuable companies dominate the daily performance of this index. Indeed, a group of seven mega-cap companies, which many refer to as the “Magnificent Seven” stocks, account for more than a quarter of the value of the 500 most valuable companies in America. That means when these stocks sneeze, the market generally has the flu.
This group, which has had many names (some investors may recall FANG or FAANG), now includes Nvidia (NASDAQ:NVDA). The company’s recent performance, tied to the AI boom, helped it become one of the most-watched stocks in the market. Along with electric vehicle (EV) maker Tesla (NASDAQ:TSLA), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), and a host of other tech-related names, these Magnificent Seven stocks have recently provided more heartburn than excitement among investors.
A recent report outlining the declines from the 52-week highs of these seven stocks has pegged investor losses at around $2 trillion. While that’s concerning for those who follow market trends, let’s dive into what these losses mean for the average investor.
Magnificent Seven Stocks Lose $2 Trillion in Value for Investors
This Investor’s Business Daily report, based on data from S&P Global Market Intelligence, paints a rather intriguing picture for investors. Indeed, while many are aware that index funds disproportionately weight these seven stocks, it’s also true that the seven companies most investors associate with the U.S. stock market are among the best and most well-run companies in the world.
Indeed, the U.S. stock market has been defined by consolidation, particularly in key industries such as biotech and technology. Larger fish swallow up smaller fish in a bid to retain sky-high growth rates seen during their earlier days. In swallowing up so many fish in their pond, what eventually happens is consumers are left with a few giant whales dominating specific industries, leading to oligopolies (or outright monopolies) and sky-high margins for the companies left.
Picking the ultimate winners in these key industries has led to incredible returns for long-term investors. And regulators in the U.S. have been more lax in allowing companies to grow to incredible size. Thus, it’s hard for many investors to complain about how large many of these companies have gotten, since the gains the market has seen since the Great Recession can be attributed, to a disproportionate degree, to the incredible performance of these behemoths.
Of course, in good times, greater concentration is an amazing thing. However, if these stocks underperform for a lengthy period of time, those holding market cap-weighted index funds could be big losers. Thus, there’s the whole “too big to fail” discussion that’s bound to take place during the next market crash.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
